# marginal costing

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```					marginal   costing

Page 1
JOIN KHALID AZIZ
ACCOUNTING(FINANACIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752

Page 2
Why do we study Marginal Costing?

Page 3
What do we study in Marginal Costing?

Marginal Cost
Marginal Costing
Direct Costing
Absorption Costing
Contribution
Profit Volume Analysis
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart

Page 4
What do we study in Marginal Costing?
and
Why do we Study MC?
Marginal Cost
Marginal Costing
Direct Costing
Absorption Costing           Management
Contribution                  Decision
Profit Volume Analysis         Making
Limiting Factor/key factor
Break Even Analysis
Profit Volume Chart
Page 5
Marginal Cost

“Marginal cost is amount at any given
volume of out put by which aggregate
costs are changed…..

if volume of output
is increased or decreased by one unit”

Page 6
Marginal Cost

“Marginal cost is amount at any given               1
volume of out put by which aggregate
costs are changed if volume of output
is increased or decreased by one unit”   Marginal Cost 100 x150= 15000
Fixed Cost            = 5000
total             20000

2
Variable costs Rs150 p u
Fixed cost Rs 5000                    Marginal cost 150 x101=15150
2 If Manufacture 101 radios           Fixed Cost            = 5000
TOTAL         20150

Page 7
Marginal Costing

“marginal costing is ascertainment of
marginal cost by differentiating between
fixed and variable costs

and of the effect
of changes in volume or type of output”

Page 8
Marginal Costing

What Could be effects of
Changes

In volume
or
Type of output

Page 9
Marginal Costing

What Could be effects of
Changes
1 lakh units
In volume                       To
2 lakh units
or
Type of output

Page 10
Marginal Costing

From One
What Could be effects of   Model of
Car to
Changes
Another

In volume
or                         From One
Type of output               Size of
product to
another

Page 11
Marginal Costing ---Characteristics

Fixed & Variable      Inventory
Costs            Valuation

Marginal Costing
MC Costs as
Contribution          &
Products Costs
Profit

Fixed Costs as
Pricing
Period Costs

Page 12
Marginal Costing ---Characteristics

Semi-variable costs
Segregation                  are segregated
Fixed & Variable                 into fixed &
Costs                         variable

Page 13
Marginal Costing ---Characteristics

Only Variable costs
Marginal Costs                 are charged
as                       to products
Products Costs

Page 14
Marginal Costing ---Characteristics

Fixed costs treated
Period costs
Fixed Costs as                Charged to costing
Period Costs                    P & L Account

Page 15
Marginal Costing ---Characteristics

WIP & F goods are
Valued at
Inventory                       Marginal Cost
Valuation

Page 16
Marginal Costing ---Characteristics

S-V=C
Contribution
Profitability judged on

Page 17
Marginal Costing ---Characteristics

Pricing is based on
Contribution &
Pricing                       Marginal Costs

Page 18
Marginal Costing ---Characteristics

A       B       C       Total

Sales           -       -   -       ----
Less VC            -       -    -      ----

Contribution       -       -       -    ----
Marginal Costing
&
Fixed Cost                              ----
Profit
Profit                                  -----

Page 19
Marginal Costing ---        Marginal Costing Profit

Sales of A        Sales of B               Sales of C

less              less                     less
Marginal cost     Marginal cost            Marginal cost
Of A              Of B                     Of C
=                =                         =
Contribution of   Contribution of          Contribution of
A                 B                        C

Total
Contribution of
A,B& C
less
Total Fixed        =       Profit/loss
Cost
Page 20
Absorption Costing

“Absorption cost is a total cost technique
Under which total cost i.e. fixed & variable
is charged to production.

Inventory is also valued at total cost.

Page 21
Absorption-Marginal Costing--differences

Measurement
Valuation                Of
Profitability
Fixed &       Of stock
Variable
Costs

Page 22
Absorption-Marginal Costing--differences

Marginal Costing     Absorption Costing

Fixed &         Only variable cost   Both F & V Costs
Variable                             Are charged
FC charged to P/L
Costs

Page 23
Absorption-Marginal Costing--differences

Valuation
Of stock

WIP & FS
at
Marginal
Total Cost
Cost

Page 24
Absorption-Marginal Costing--differences

Measurement
Of
Profitability

C=S-V         P=S-V-F

Page 25
Comparative Cost Statement

Marginal Costing                             Absorption Costing
Months                                           Months
1          2          3         Total        1      2             3      Total
Rs         Rs         Rs          Rs         Rs     Rs            Rs      Rs

(A) Sales              2,00,000 1,65,000    2,35,000 6,00,000   2,00,000   1,65,000   2,35,000
6,00,000
Opening Stock          84,000 84,000       1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost           1,20,000 1,20,000     1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost             _         _           _       _        35,000    35,000 35,000 1,05,000

Total Cost            2,04,000 2,04,000     2,25,000 6,33,000 2,63,000 2,63,000       2,90,625 8,17,625

Less C Stock           84,000    1,05,000    84,000   2,73,000 1,08,000 1,35,625      1,08,500 3,52,625

(B) COGS            1,20,000     99,000   1,41,000 3,60,000   1,55,000   1,27,875 1,82,125 4,65,000

Contribution (A-B)c    80,000     66,000     94,000 2,40,000     _          _         _          _

( D) F Cost           35000      35,000     35,000 1,05,000     _           _        _          _

Profit (C-D)           45,000     31,000     59,000 1,35,000
(A-B)
45,000    37,125          Page 26
52,875  1,35000
Comparative Cost Statement

Marginal Costing                              Absorption Costing
Months                                           Months
1          2          3         Total         1     2             3     Total
Rs         Rs         Rs          Rs          Rs    Rs            Rs     Rs

(A)Sales              2,00,000 1,65,000     2,35,000 6,00,000   2,00,000   1,65,000   2,35,000 6,00,000
Opening Stock           84,000 84,000       1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost            1,20,000 1,20,000     1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost               _         _           _       _        35,000    35,000 35,000 1,05,000

Total Cost            2,04,000 2,04,000     2,25,000 6,33,000 2,63,000 2,63,000       2,90,625 8,17,625

Less C Stock           84,000    1,05,000    84,000   2,73,000 1,08,000 1,35,625      1,08,500 3,52,625

(B) COGS            1,20,000     99,000   1,41,000 3,60,000   1,55,000   1,27,875 1,82,125 4,65,000

Contribution (A-B)c    80,000     66,000     94,000 2,40,000      _          _        _         _

( D) F Cost           35000      35,000     35,000 1,05,000     _           _        _         _

Profit (C-D)           45,000     31,000     59,000 1,35,000
(A-B)
45,000     37,125         Page 27
52,875  1,35000
Comparative Cost Statement

Marginal Costing                              Absorption Costing
Months                                           Months
1          2          3         Total         1     2             3     Total
Rs         Rs         Rs          Rs          Rs    Rs            Rs     Rs

(A)Sales              2,00,000 1,65,000     2,35,000 6,00,000   2,00,000   1,65,000   2,35,000 6,00,000
Opening Stock           84,000 84,000       1,05,000 2,73,000 1,08,000 1,08,500 1,35,625 3,52,625
Add V Cost            1,20,000 1,20,000     1,20,000 3,60,000 1,20,000 1,20,000 120,000 3,60,000
F Cost               _         _           _       _        35,000    35,000 35,000 1,05,000

Total Cost            2,04,000 2,04,000     2,25,000 6,33,000 2,63,000 2,63,000       2,90,625 8,17,625

Less C Stock           84,000    1,05,000    84,000   2,73,000 1,08,000 1,35,625      1,08,500 3,52,625

(B) COGS            1,20,000     99,000   1,41,000 3,60,000   1,55,000   1,27,875 1,82,125 4,65,000

Contribution (A-B)c    80,000     66,000     94,000 2,40,000      _          _        _         _

( D) F Cost           35000      35,000     35,000 1,05,000     _           _        _         _

Profit (C-D)           45,000     31,000     59,000 1,35,000
(A-B)
45,000     37,125         Page 28
52,875  1,35000
Concept Of Contribution

Page 29
Contribution is the difference between sales
And the marginal (Variable) cost

Contribution =sales-variable cost
C= S-V
Contribution = Fixed Cost+ Profit
C= F+P
Therefore
S-V = F+P

Page 30
Contribution is the difference between sales
And the marginal (Variable) cost

S-V=F+P

If any 3 factors in the equation are known
The 4th could be found out

P=S-V-F
P=C-F
F=C-P
S=F+P+V
V=S-C……….

Page 31
PROFIT ?            SALES?
C=S-V
Sales =Rs 12,000
=12,000-7000=5000   S=C+V

V Cost=RS 7,000    P=C-F
=5,000+7,000
F Cost=Rs 4,000    =5,000-4000          =Rs 12,000

=Rs 1,000

Page 32
F COST?        V Cost?

Sales =Rs 12,000   F=C-P          V=S-C
V Cost=RS 7,000
=5,000-1,000    =12,000-5000
F Cost=Rs 4,000                    =Rs 7,000
=Rs 4,000

Page 33
Profit –Volume Ratio (PV Ratio)
(Expresses the relation of Contribution to sales)

Sales= Rs 10,000

V Cost=Rs 8,000
P/V Ratio =Contribution   = C/S =S-V/S
Sales

C = S XP/V Ratio
P/V Ratio=c/s
C
=S-V/S
S = --------
=10,000-8000/10,000
P/V Ratio
=20%

Page 34
Profit –Volume Ratio (PV Ratio)

When PV
Ratio is
Given

C= SXPV Ratio

C= 10000X20%
=Rs 20,000

Page 35
Profit –Volume Ratio (PV Ratio)

Change in Contribution
P/V Ratio =    ---------------------------------           Another Method
Change in Sales

Change in profit
=     -----------------------
Change in Sales
Year   sales     net profit

2005   20,000     1000
1600-1000
=-------------------x 100
2006    22,000    1600
22000-20000

600
= -----------x100=30%
2,0000
Page 36
What Could be the Uses of PV Ratio?

Break Even Point

Profit at Given Sales

Vol required to earn given Profit

Page 37
How Improvement in PV Ratio Could be Achieved?

Increasing Selling Price

Reducing Variable Cost

Changing Sales Mix

Page 38
Limiting Or Key Factor

a factor in short supply

Page 39
Limiting Or Key Factor

a factor in the activities of an undertaking
which at a point of time or over a period
will limit the volume of out put

Page 40
Limiting Or Key Factor

What Could be the Limiting Factors ?

Labour
Materials
Power
Sales
Capacity
Machines
………….
Page 41
Cost- Volume- Profit Analysis

Page 42
Cost- Volume- Profit Analysis

Cost Of Production

Selling Prices

Volume Produced /Sold

Page 43
Cost- Volume- Profit Analysis

Break Even Analysis

Profit Volume Chart

Page 44
Cost- Volume- Profit Analysis

Break Even Analysis

A point of no profit no loss

A point where revenue equals cost

Page 45
What are BEP---assumptions

All costs are fixed or variable
VC remains Constant
Total FC remains Constant
Selling Price don’t change With Volume
Synchronisation of Prod & Sales
 No Change in Productivity per workers

Page 46
Cost- Volume- Profit Analysis

Break Even Analysis

Methods

Algebraic Method

Graphic Method

Page 47
Cost- Volume- Profit Analysis
ALGEBRAIC
Fixed Cost                     METHOD
BEP (Units) = ---------------       = F
Contribution PU          S-V

Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution

Fixed Cost
BEP (Rs)    = ------------------
P/V Ratio

Page 48
Cost- Volume- Profit Analysis
ALGEBRAIC
Fixed Cost                             METHOD
BEP (Units) = ---------------       = F
Contribution PU          S-V

Fixed Cost
BEP (Rs ) = ----------------- x Sales
Contribution
F Cost=Rs 12000
Fixed Cost               S Price=Rs12 pu
BEP (Rs)    = ------------------        V Cost =Rs 9 pu
P/V Ratio
Find BEP

Page 49
Cost- Volume- Profit Analysis
F Cost=Rs 12000
Other Uses                   S Price=Rs12 pu
V Cost =Rs 9 pu

Profit when sales are

Profit at diff. Sales Vol.   a) Rs 60,000
b) Rs 1,00,000

Sales at Desired Profit

Page 50
Cost- Volume- Profit Analysis
F Cost=Rs 12000
S Price=Rs12 pu
Profit at diff. Sales Vol.         V Cost =Rs 9 pu

Profit when sales are
C
P/V Ratio= ----- = 3/12=25%        a) Rs 60,000
S                     b) Rs 1,00,000

WHEN SALES=Rs 60,000

contribution=salesxp/vratio
=60000x25%
=Rs 15000
Profit  =contribution-fixed cost
=15000-12000
=Rs3000
Page 51
Cost- Volume- Profit Analysis

Other Uses                               F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu

Sales at Desired Profit                  Sales if desired profit
a) Rs 6000
b) Rs 15,000

F Cost +Desired Profit
Sales= -------------------------------
P/V Ratio

Page 52
Cost- Volume- Profit Analysis

Sales at Desired Profit                  F Cost=Rs 12000
S Price=Rs12 pu
V Cost =Rs 9 pu
F Cost +Desired Profit
Sales= -------------------------------   Sales if desired profit
P/V Ratio                    a) Rs 6000
b) Rs 15,000

12,000+6000
a)Sales= ---------------
25%

=Rs 72,000

Page 53
CVP Analysis -question

P ltd has earned a profit of Rs 1.80 lakh on sales of
Rs 30 lakhs and V Cost of Rs 21 lakhs.
work out

a)BEP
b)BEP When V Cost decreases by5%
c)BEP at present level when selling price reduced by5%

Page 54
CVP Analysis -

S-V
P/V Ratio=--------
S
3000000-2100000
= ------------------------
3000000
=30%
Sales    =VC+FC+P
3000000=2100000+FC+180000
FC    =Rs 720000
7,20,000
BEP= -------------
30%

=Rs 2400000
Page 55
CVP Analysis -question

b) When V Cost increases by 5%

New Variable Cost=2100000+5%
=22,05,000

PV Ratio      3000000-2205000
3000000
=26.5%

BEP          =7,20,000/ 26.5%

=Rs 27,16,981

Page 56
CVP Analysis -question

c)When Selling Price reduced by 5%

New SP=3000000—5%
=Rs 28,50,000

Contribution=28,50,000-21,00,000
=Rs7,50,000

PV Ratio    =7500000/2850000
=26.32%

FC+PROFIT
Desired Sales= ------------------ = 720000+1800000
PV Ratio                26.32%

=Rs 34,19,453( appx)
Page 57
BEP

Graphical Presentation

Page 58
Break-Even Analysis
Costs/Revenue
Initially a firm
will incur fixed
costs, these do
not depend on
output or sales.

FC

Q1                    Output/Sales

Page 59
Break-Even Analysis
Total revenue point
The Break-even is
As lower
occursoutputais the
The where by  firm
Initially total
The total costs the
determined the
Costs/Revenue             TR
generated,
will incur less
price,equals and
thereforethe fixed
revenuecharged total
TR        TC          price will incur
firm the firm,do
VC     the – the sold
costs,
steep these –
(assumingcosts in
costs quantitytotal–
variable would
this not depend on
example
again this curve.
accurate will be
revenue Q1 to
thesesell sales.
have to vary by
output or
determined the
forecasts!) is the
directly with
generate sufficient
expected produced
amount forecast
sum of FC+VCits
revenue to cover
sales initially.
costs.

FC

Q1                       Output/Sales

Page 60
Break-Even Analysis
Costs/Revenue                             If the firm chose
TR      TR   TC           to set price higher
VC      than Rs2 (say
Rs3) the TR curve
would be steeper –
they would not
have to sell as
many units to
break even

FC

Q2      Q1                    Output/Sales

Page 61
Break-Even Analysis
TR)
Costs/Revenue                                     If the firm chose
TR
TC           to set prices lower
VC      it would need to
sell more units
before covering its
costs

FC

Q1        Q3                   Output/Sales

Page 62
Break-Even Analysis
TR
Costs/Revenue                       TC
Profit    VC

Loss
FC

Q1                          Output/Sales

Page 63
Break-Even Analysis
Margin of
TR        TR
TC           safety shows
Costs/Revenue                                         A far sales
how higher price
VC        would lower
can fall before
Assume If
the break
current and
Q1 = 1000sales
even point
Q2 = 1800, sales
at Q2
and the
could fall by 800
margin a
units beforeof
loss would be
safety would
widen
Margin of Safety
FC

Q3         Q1   Q2                    Output/Sales

Page 64
High initial FC.
Interest on debt
rises each year – FC
Costs/Revenue     rise therefore
FC 1

FC
Losses get
bigger!
TR
VC

Output/Sales

Page 65
Break-Even Analysis

• Remember:
• A higher price or lower price does not
mean that break even will never be
reached!

• The BE point depends on the sales
needed to generate revenue to cover
costs

Page 66
Break-Even Analysis

• Importance of Price Elasticity of Demand:

• Higher prices might mean fewer sales to break-
even

• Lower prices might encourage more customers
but higher volume needed before sufficient
revenue generated to break-even

Page 67
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity

• Penetration pricing – ‘high’ volume, ‘low’ price –
more sales to break even

Page 68
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity

• Market Skimming – ‘high’ price ‘low’ volumes –
fewer sales to break even

Page 69
Break-Even Analysis
• Links of BE to pricing strategies and
elasticity

• Elasticity – what is likely to happen to sales
when prices are increased or decreased?

Page 70
Marginal Costing
Cost Volume Chart

Page 71
Construction Of PV Chart

1 select a scale on Horizontal axis---sales

2 Select a scale on Vertical axis- FC & Profit

3 Plot FC & Profit

4 Diagonal line crosses sales line at BEP

Page 72
PV Chart Information

Fixed Cost =Rs 5000
Sales     =Rs 20000(pu RS 20)
V Cost=    Rs 10000(pu Rs10)

Find
PV Ratio, BEP, Profit?

Page 73
Construction Of PV Chart

8000

6000
BEP                          5000
4000

2000
Fixed Cost
Rs
Profit
0       5000     10000    15000     20000          Rs
Sales Rs
2000

4000
5000
6000

8000

Page 74
Construction Of PV Chart

8000

6000
BEP                                   5000
4000

2000
Profit
Fixed Cost
Area                    Profit
Rs
0          5000    10000           15000        20000          Rs
Sales Rs
Loss
2000
Area
4000                              Margin of Safety
5000
6000
--------------------------
8000

Page 75
Effect Of Change in Profit- 20% decrease in fixed Cost

New F Cost= 5000- 20%=Rs4000

Fixed Cost
New BEP =      PV Ratio
= 4000/50%
=Rs 8000
New Profit=S-F-V
=20000-4000-10000
=Rs 6000
Page 76
Effect of Change in profit- 20% decrease in FC

8000
6000

BEP                              5000
4000

2000
Profit
Fixed Cost
Area                    Profit
Rs
0          5000    10000       15000       20000          Rs
Sales Rs
Loss
2000
Area
4000
5000
6000

8000

Page 77
Effect Of Change in Profit- 10% decrease in V Cost

New V Cost= 10000- 10%=Rs9000
New PV Ratio=20000-9000 =55%
20000

Fixed Cost
New BEP =      PV Ratio
= 5000/55%
=Rs 9090 Appx
New Profit=S-F-V
=20000-5000-9000
=Rs 6000
Page 78
Construction Of PV Chart

8000
6000
New BEP
5000
4000

2000
Profit
Fixed Cost
Area                    Profit
Rs
0          5000        10000    15000       20000          Rs
Sales Rs
Loss
2000
Area
4000
5000
6000

8000

Page 79
Effect Of 5% Decrease in Selling Price

8000
6000

5000
4000

2000
Profit
Fixed Cost
Area                    Profit
Rs
0          5000   10000     15000       20000          Rs
Sales Rs
Loss
2000
Area
4000
5000
6000

8000

Page 80
ATTENTION COMMERCE
STUDENTS
ACCOUNTING(FINANACIAL & COST) OF
ICMAP STAGE 1,2,3,4 (NEW CLASSES)
CA..MODULE B,C,D
PIPFA (FOUNDATION,INTERMEDIATE,FINAL)
ACCA-F1,F2,F3
BBA,MBA
B.COM(FRESH),M.COM
MA-ECONOMICS..O/A LEVELS
KHALID AZIZ…..0322-3385752

Page 81

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